Role of Economics in Competition Law

Competition law is essentially concerned with the study of markets, the objective being to ensure that there is competition between the suppliers in any market and that this competition benefits consumers. At the day-to-day level, applying competition law involves identifying markets and assessing whether competition is working well in those markets. It involves assessing how the actions of firms will affect competition and consumers. These are essentially economic issues. As the Competition Commission of India (CCI) commences its operations with a mandate, inter-alia , to preserve and promote competition in the markets, a quick appraisal on the role economic analysis is going to play in competition assessment will be just in place.

Economists study how markets allocate goods and services to different consumers. They are interested in how consumers fare when there are more or fewer competitors, when firms merge or when firms change their behaviour. They are also interested in why firms behave in certain ways. Economics attempts to provide answers to such questions. Understanding economics will give clarity on how markets operate, how firms will behave in particular markets, and whether their behaviour will result in competition that benefits consumers.

Economics is, therefore, being recognised as an essential tool to assess market power and to determine boundaries of the market in which such market power is to be analysed by competition authorities. It is, therefore, imperative for legal practitioners in India to develop a clear understanding of the economic issues, such as determination of the correct relevant market, determination of entry barriers that may, inter-alia , be created by behaviour of certain firms. It has been aptly stated by Brandeis J, “A lawyer who has not studied economics — is very apt to become a public enemy.” Competition lawyers in the EU and the US regularly work with economists who specialise in matters such as market definition, the determination of market power and the analysis of particular type of business behaviour. It will be interesting to trace the growth of competition jurisprudence in the US and the EU.

In the US, under the Structure-Conduct-Performance model, which prevailed in the 1930s, the focus of attention was on concentrated industries where barriers for entries were widespread. This school of thought remained popular till the 1960s and led to an extremely interventionist antitrust enforcement policy in the US. The change came in the form of Chicago School of thought that produced revolution in antitrust thinking in the US. The Chicago view that pursuit of efficiency — by which it meant allocative efficiency as defined by the market — became the sole goal of antitrust. Chicago School places much belief in the ability of the market to correct and achieve efficiency itself without interference from government or antitrust law.

Chicago School has changed antitrust thinking profoundly not only in the US but everywhere. Greater emphasis is now being placed by the US courts on economic analysis of a particular behaviour to examine its likely effect on competition in the relevant market. The US has entered a less-doctrinaire age, where there is more reliance on the ‘rule of reason’ analysis against the earlier ‘per se’ approach.

The European law stresses on ‘effective competition’ in which the emphasis is on the effect of competition on consumer welfare. Competition Policy, which has been included in the list of community activities set out in Article 3 of the Treaty of Rome, has played an important role in the achievement of single European market integration, particularly after the enlargement of the European Union on May 1, 2004.

November 3, 2009

The recent anti-trust raids on Ranbaxy’s France unit by the European Commission (EC) has not come as a surprise, given that most pharmaceutical companies in India manufacture generic drugs. These drugs contain same active ingredients as the original formulations invented by the “originator” companies, mostly from Europe or United States, and in most cases the usual life (20 years) of the patents have expired or are about to expire
The EC apprehends that the originator pharmacy companies may be colluding with the generic companies to delay entry of cheaper generic versions of the original patented drugs in the common European markets. That may not be far from truth.

There is no denying the fact that the global pharma industry, which, due to the inelastic demand of its products, was perceived to be recession-proof at one time. It is now feeling the pinch of the economic downturn, and so some players are seeking remedies by adopting anti-competitive and even unfair trade practices. The Indian drug makers are no exception and seem to have pinned their hopes on the potential for generics business worldwide. Incidentally, our companies are not the pioneers in this strategy.
The global pharmaceutical industry has a long history of indulging anti-competitive practices, particularly, cartelisation. Two most famous cases of cartelisation i.e. the Lysine cartel and the Vitamins cartel deserve a mention. But this “historical” background of cartelisation in the pharmaceutical industry has, perhaps, no link with the recent focus on this sector by the anti-trust authorities in Europe or elsewhere.
Perhaps the large global players having learnt their lessons hard due to the heavy fines they paid for cartelisation, have now invented less harmful or offending anti-competitive techniques of “buying out” the generic drug manufacturers, particularly in developing economies such as India, China, Brazil and Russia.
The recent raids on Indian generic companies in Europe appear to be the beginning of the series of raids that may follow, given the fact that the EC under its firebrand Commissioner Neelie Kroes has taken a very pro-active stance in its anti-trust enforcement rules. The launching of “sector-inquiry” covering key sectors of the economy has become EC’s latest investigative tool. Such methods are used when a market does not seem to be working as well as it should.
Limited trade between member states, lack of new players in the market, price rigidity or such other evidence suggesting distortion of competition are some indicators for initiation of a sector inquiry. The sector inquiry in the pharmaceutical sector was initiated by the EC on January 15, 2008 and concluded with the adoption of the final report on July 8, 2009.
The primary focus of the inquiry was the competitive relationship between originator and generic companies and among originator companies. For this, 43 originator companies and 27 generic companies — representing 80% of the relevant turnover in the EU — were selected for an in-depth analysis. Needless to say, after releasing its “final report” on July 8, the EC immediately decided to open formal anti-trust investigation against French pharmaceutical (originator) company “Servier” for suspected breach of EC Treaty rules on restrictive or anti-competitive business practices (Article 81) and on possible abuse of market power or dominant position (Article 82).
As a part of this formal investigation, EC announced on the said date that it had information that three Indian generic companies, Lupin Ltd, Matrix Laboratories Ltd (subsidiary of Mylan Inc) and Niche Generics Ltd (subsidiary of Indian Unichem Laboratories Ltd) along with a Slovenian company KRRA and an Anglo-Israeli company Teva UK Ltd/Teva Pharmaceutical Industries Ltd, have entered into secret agreements with the French originator company “Servier”, apparently to delay the entry of the generic version Servier’s Perindropil, a life saving drug for hypertension.
This is not the first time that EC has looked into this malpractice in the pharmaceutical industry. On June 15, 2005, a fine of Euro 60 million was imposed on AstraZeneca AB and AstraZeneca plc (AZ) for infringement of Article 82 of Treaty, for misusing public procedures and regulations in a number of EEA states with a view to excluding generic firms and parallel traders from competing against AZ’s anti-ulcer drug Losec.
The infringement alleged to have been committed by the Indian pharma companies are similar to the one that was proved against AZ as in both the cases delay was caused in the entry of generic versions of the drug. The heavy fines imposed on AZ are likely to serve as precedent for the EC while deciding the fines on the Indian companies.
The Competition Act, 2002 also has similar provisions under section 3 and 4, that can be invoked by the newly re-constituted Competition Commission of India (CCI) to investigate similar possible collusive agreements between the originator pharmaceutical companies, mostly European or American and the Indian generic companies.

CCI is empowered under Competition Act, 2002 to institute a suo moto inquiry after an investigation by the director-general. The CCI can also seek technical assistance and sign memorandum of understanding with EC, with the prior approval of the central government, for which specific provisions exist in the Act.

 Comdt. (Retd.) M. M. Sharma heads the Competition Law & Policy team in VA since 2009 and has over 30 years’ experience as an Advocate of Delhi High Court and holds a Post Graduate Diploma in Economics of Competition Law from Kings College, London. He has worked in the Competition Commission of India (CCI) as Additional Registrar during 2006-2008 and was responsible for drafting the Implementing Regulations under the Competition Act, 2002. He has experience of working as Head-Legal /In-house Counsel for a large Corporate Group in the Steel and Power sector before joining VA in 2009. He has represented clients as an independent arguing Counsel in landmark cases decided by CCI, the Competition Appellate Tribunal (COMPAT) , High Courts and the Supreme Court. As a prolific writer, he contributes articles and is regularly quoted on competition issues in National Newspapers and interviewed by TV Channels. He also teaches as a visiting faculty in various Universities and Institutions and is widely regarded as a subject expert in various Committees of Apex Business Chambers, such as FICCI, CII, ASSOCHAM and PHD CCI.
 Mr. Sharma has been mentioned as a “Notable Practitioner” in the “Competition/Antitrust” category of Chambers & Partners (Asia Pacific) Ranking of Leading Lawyers for Business in India for the year 2012 and 2013. VA’s competition law and policy team has also been awarded the Law Firm of the Year Award for “Competition/Antitrust Law” for 2013 by the Indian Business Law Journal.